PPF or ELSS? Where should I Invest to Save Tax?

Published: December 12, 2014 at 8:53 am

Last Updated on January 3, 2016 at 9:40 pm

The  primary stumbling block that prevents investors from achieving  holistic fiscal health is mental clutter. Their minds are filled with the wrong questions.   The right question is a prerequisite for finding the right answer.

One such wrong question, and the flavour of the season is: Where should  I invest to save tax? PPF or ELSS?

I don’t even know where to begin answering this question because the question is wrong at so many levels.

1)  If asked at the end of the financial year, it often betrays ignorance and apathy about goal-based investing. Try telling the person to, list goals, decide on asset allocation and then incorporate tax planning as an integral part of a long-term goal, and they would often react like you have not understood their question, get all jittery and impatient.


Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

The simple truth is most people do not know how to process information. It amuses me to no end that such people cannot get enough of  information: they  read every article, every thread in a forum, subscribe to every blog, but cannot extract actionable steps from them.  Neither will they seek professional help for the same.

2) It is an apples vs oranges comparison. How can you compare a fixed income product locked in for 15 years with a diversified equity fund locked in for 3 years?!

Purely from the point of view of a lock-in, most investors fail to recognise that dependency on tax-saving products is likely to decrease as income grows, because the mandatory products like EPF and NPS will the cover more and more of the 80C limit. So  it is better to prefer products with a minimal lock-in. This allows you to chuck the product down the line.

So ELSS is a clear winner from this angle. The 3Y lock-in is the smallest and it is the most flexible. However, the underlying  asset class, equity, is not meant for 3-year durations!

3)  One cannot think of choosing equity without understand the nature of the stock market. You can stay invested for 3Y or 30Y, the volatility will never die down. So investors have no choice, but to get used to it. It is important to recognise that you  invest some capital to save tax, but that capital could be lost due to stock market fluctuations.  Over 3 years, the probability of loss is so huge that one cannot offer a meaningful estimate of expected returns!

This means that ELSS investors should continue to use them as long as they need the tax-saving and shift future investments and invested corpus to non-tax saving equity instrument. Otherwise,  it would result in clutter and improper goal planning.

Thus before choosing a tax saving instrument, it is important to understand the nature of the asset class and act accordingly.

Wait a minute, understanding market volatility would take a while. So let me rephrase that:

Thus before choosing a tax saving instrument, it is important to understand that it is important to understand the nature of the asset class and act accordingly.

In others words, invest in ELSS, but be sure to start learning more about volatile compounding!

What is the way out?

Most of us would need to use tax-saving instruments until we die. Retirement is a goal that would outlive us if we have a dependent spouse. So tagging tax-saving instrument to the retirement is the most natural solution.

 

Since beating inflation is practically mandatory for retirement, we would need adequate equity exposure (60-70%). Meaning, ELSS is a natural choice.

Instead of ‘PPF or ELSS?’, the question ought to be ‘PPF or debt fund  plus ELSS?’

Since the retirement corpus will not get spent in one shot, most of the accumulated corpus in the debt part of the portfolio would get spent gradually over a few years.  Since debt fund gains are tax only upon redemption and to the extent of the redemption, I like debt funds more than PPF. It is far more flexible, even though many  (if not most) debt funds may or may not be able to beat PPF returns over a 15 year period, due to the nature of the bond market and of course taxation.

My point is, while PPF is certainly not a bad choice, it is not necessary for tax saving. The danger of low interest rates in future must be factored in – most people fail to do that. Esp those who compulsively invest the full amount! Read why you should not do so.

One can invest only in ELSS funds with the rest in a debt fund (non-tax saving) in line with a set asset allocation, say, 70% equity and 30% debt.

Not suggesting that this is a better way. Just pointing out that there are multiple solutions to practically all questions in personal finance.

Understanding that would require asking the right questions. In this case,

To which goal should I tag my tax saving instruments?, and not, where do I invest?  If the goal is clear, the instruments would become clear.

Those who seek the ‘best’ solution are confused because of their refusal to realise that there  is none.  The moment we embrace the possibility of multiple solutions, we are clear that all we need to do is to choose one solution that impresses us – counterintuitive, but true.

Embrace it, we must, for multiple solutions is the law of nature.

  • with inputs from facebook group, Asan Ideas For Wealth.
Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.

  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)